Tyco International: Leadership Crisis

Group-4 Section-1

1. What are the Ethical and Legal issues in this case?

Ethical Issues: Kozlowski handpicked a few trusted people and placed them in key positions Kozlowski has used company funds to buy luxury homes, fine arts, yachtsetc. Kozlowski has paid $20mn to a director for CIT merger The people who saw the red flags at Tyco international were shot down, including Jeanne Terrile at Merrill Lynch

Legal Issues: Kozlowski avoided $3.1 million in New York state taxes. Kozlowski and Swartz had stolen $170mn from Tyco international and fraudulently sold an additional $430mn in stock options Kozlowski has taken $242mn from a program intended to help employees Company has followed aggressive accounting principles

2(a) What role did Tycos corporate culture play in the scandal?
Tycos corporate culture was set in motion starting back in 1970s and early 1980s Chief Executive Officer (CEO) Joseph Gaziano was running the company. That lavish lifestyle made a lasting impression on Dennis Kozlowski in his early years with working for Tyco.
This led to diverting the company funds for buying luxury houses, yachts, stock options etc. This led to having an unofficial headquarters in New York and Kozlowski lavished it with every imaginable perk. Still none has objected this. In addition to this, board of directors were even taking company funds illegally and they were never opposing the CEO.

2(b) What role did Board of directors CEO,CFO, Legal counsel play?
Board of Directors: They were convinced by lobbying in Wormard acquisition. They were received money from CEO and they too used company funds illegally CEO: Diverted company funds to buy stock options, luxury home, yachts CFO: Generally companies will follow conservative accounting. But he went for aggressive accounting and this lead to a profit of $382bn

Legal counsel: Though he knew that CEO has illegally diverted the funds, still he didnt respond

3. Have Tycos recent actions been sufficient to restore confidence in the company? What other actions should the company take to demonstrate that it intends to pay by the rules?
To restore investors faith company has taken measures like: Electing completely new board of directors and making the board chairman to be an independent person New management team is working to reorganize the company and recover some of the funds allegedly taken by Kozlowski

Other actions:
Company should implement the Sarbanes-Oxley Act of 2002 Company should maintain transparency in its policies There should be tenure for board of directors not exceeding 10 years

4. How will the implementation of the Sarbanes-Oxley Act of 2002 prevent future dilemmas in Tyco?
Sarbanes-Oxley Act of 2002: An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. Section 302: A mandate that requires senior management to certify the accuracy of the reported financial statement .

Section 404: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls.

 As in the section 302, makes senior management more responsible on reporting the financial statements as they should certify it. So this makes Tyco senior management not to repeat the any accounting mistakes. Under Section 404 of the Act, management is required to produce an "internal control report" as part of each annual Exchange Act report. The report must affirm "the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. This report makes Tyco management to list all their accounting policies.